RBI sticks to script with 25 bps cut

Steps to up liquidity could mean cheaper loans

RBI governor Raghuram Rajan indicated that it could take around eight months or thereabouts to bring down the liquidity deficit to 0% of the net demand and time liabilities; currently, the deficit is targeted at 1% or Rs 80,000 crore. (Express Photo)

While the Reserve Bank of India (RBI) on Tuesday pruned the key repo rate by 25 basis points, it’s the slew of steps announced by the central bank to enhance liquidity that will go a longer way in bringing down lending rates, albeit over a period of time.

RBI governor Raghuram Rajan indicated that it could take around eight months or thereabouts to bring down the liquidity deficit to 0% of the net demand and time liabilities; currently, the deficit is targeted at 1% or Rs 80,000 crore. On a rough reckoning, achieving that would require the central bank to purchase close to Rs 25,000 crore a month — of domestic and foreign assets — given the existing ‘stock’ of deficit is approximately Rs 2 lakh crore.

Rajan said on a call with analysts that the improved liquidity would help the pass-through of the cuts in the repo rate, now a total of 150 basis points since January 2015.

“I am not giving a forecast but a broad sense of the numbers that we are talking about. The situation on the ground, and the extent of inflows that we get, will determine the extent of our purchases of domestic bonds over time. If you think the deficit is about 1% of NDTL, which means about `80,000 crore, it will take us eight months to cover this deficit up,” the governor observed.

While ruling out any immediate relief to borrowers, bankers observed that once money supply improved it should be possible to bring down deposit rates and, consequently, lower loan rates.

Arundhati Bhattacharya, chairman, State Bank of India (SBI), said lending rates would come down over time. “It’s difficult to lower rates immediately since banks depend on deposits rather than borrowings to fund their assets. However, as liquidity improves and the cost of funding drops, loan rates will come down,” Bhattacharya explained, cautioning at the same time that the rate of growth of deposits has been slowing.

Keki Mistry, vice-chairman and CEO, HDFC, also ruled out an immediate cut in lending rates, saying liquidity needed to ease before loans could get cheaper. “The repo cut impacts only a small part of the borrowings. Our costs need to come down for us to drop rates,” Mistry observed.

Despite banks having lowered deposit rates by about 80-100 basis points over the past year or so, lending rates have not come down because of inadequate liquidity in the system. The high currency in circulation — probably caused by the several state elections — has added to the problem.

The stock and bond markets were somewhat disappointed after Tuesday’s policy announcements as many were expecting an immediate infusion of liquidity via policy measures. Bond yields rose marginally even though the central bank announced an open market operation of `15, 000 crore later this week.

“The highlighting of upside risks to inflation outcomes in the RBI’s statements probably partly offsets the impact of a dovish guidance,” Samiran Chakraborty, economist at Citigroup, wrote in a note. The RBI had observed that the impact of the higher house rent — recommended by the Seventh Pay Commission — could impact inflation. The governor, however, clarified that all increases in pay that had been baked into the government’s expenses for 2016-17 had been factored while projecting inflation. The RBI expects CPI inflation to moderate and remain at around 5% in 2016-17. The central bank has projected growth in GVA at 7.6% in 2016-17, saying the fading impact of lower input costs on value addition in manufacturing, persisting corporate sector stress and risk aversion in the banking system and the weaker global growth and trade outlook could impart a downside to growth outcomes going forward.